10/11/2012

Further Adventures in Revlon-land

I just finished reading Robert T. Miller's article Journeys in Revlon-Land with a Conflicted Financial Advisor: Del Monte and El Paso (October 1, 2012). Available at SSRN: http://ssrn.com/abstract=2156488. Abstract follows:

Two recent cases in the Delaware Court of Chancery, In re Del Monte Foods Co. Shareholders Litigation and In re El Paso Corp. Shareholders Litigation, concern potential breaches of target directors’ Revlon duties when the company’s financial advisor has a conflict of interest related to the potential transaction. This article analyzes these cases with a view to exploring two main issues: (a) how breaches of the financial advisor’s duty of loyalty as an agent can support a claim that directors have breached their Revlon duties even if their reliance on the agent was entirely innocent, and (b) how, under Revlon, the directors’ fully-informed decision to engage or retain a financial advisor with a fully-disclosed conflict of interest should relate to subsequent decisions that the board may make relying on advice from such an advisor.

I found this article to be highly impressive. It's an excellent analysis of an important part of Revlon-land and has the added virtue of being concise and focused. I recommend reading it in conjunction with my article The Geography of Revlon-Land, 81 Fordham Law Review ___ (forthcoming 2013) (available at SSRN: http://ssrn.com/abstract=2115769), which takes a somewhat broader view of the strange place affectionately known as Revlon-land:

In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the Delaware Supreme Court explained that when a target board of directors enters Revlon-land, the board’s role changes from that of “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.”

Unfortunately, the Court’s colorful metaphor obfuscated some serious doctrinal problems. What standards of judicial review applied to director conduct outside the borders of Revlon-land? What standard applied to director conduct falling inside Revlon-land’s borders? And when did one enter that mysterious country?

By the mid-1990s, the Delaware Supreme Court had worked out a credible set of answers to those questions. The seemingly settled rules made doctrinal sense and were sound from a policy perspective.

Indeed, my thesis herein is that Revlon and its progeny should be praised for having grappled — mostly successfully — with the core problem of corporation law: the tension between authority and accountability. A fully specified account of corporate law must incorporate both values. On the one hand, corporate law must implement the value of authority in developing a set of rules and procedures providing efficient decision making. U.S. corporate law does so by adopting a system of director primacy.

In the director primacy (a.k.a. board-centric) form of corporate governance, control is vested not in the hands of the firm’s so-called owners, the shareholders, who exercise virtually no control over either day-to-day operations or long-term policy, but in the hands of the board of directors and their subordinate professional managers. On the other hand, the separation of ownership and control in modern public corporations obviously implicates important accountability concerns, which corporate law must also address.

Academic critics of Delaware’s jurisprudence typically err because they are preoccupied with accountability at the expense of authority. In contrast, or so I will argue, Delaware’s takeover jurisprudence correctly recognizes that both authority and accountability have value. Achieving the proper mix between these competing values is a daunting — but necessary — task. Ultimately, authority and accountability cannot be reconciled. At some point, greater accountability necessarily makes the decision-making process less efficient. Making corporate law therefore requires a careful balancing of these competing values. Striking such a balance is the peculiar genius of Unocal and its progeny.

In recent years, however, the Delaware Chancery Court has gotten lost in Revlon-land. A number of Chancery decisions have drifted away from the doctrinal parameters laid down by the Supreme Court. In this article, I argue that they have done so because the Chancellors have misidentified the policy basis on which Revlon rests. Accordingly, I argue that Chancery should adopt a conflict of interest-based approach to invoking Revlon, which focuses on where control of the resulting corporate entity rests when the transaction is complete.

This is a revised version of the article, with an expanded discussion of the relevant Chancery Court cases.

Comments

I just finished reading Robert T. Miller's article Journeys in Revlon-Land with a Conflicted Financial Advisor: Del Monte and El Paso (October 1, 2012). Available at SSRN: http://ssrn.com/abstract=2156488. Abstract follows:

Two recent cases in the Delaware Court of Chancery, In re Del Monte Foods Co. Shareholders Litigation and In re El Paso Corp. Shareholders Litigation, concern potential breaches of target directors’ Revlon duties when the company’s financial advisor has a conflict of interest related to the potential transaction. This article analyzes these cases with a view to exploring two main issues: (a) how breaches of the financial advisor’s duty of loyalty as an agent can support a claim that directors have breached their Revlon duties even if their reliance on the agent was entirely innocent, and (b) how, under Revlon, the directors’ fully-informed decision to engage or retain a financial advisor with a fully-disclosed conflict of interest should relate to subsequent decisions that the board may make relying on advice from such an advisor.

I found this article to be highly impressive. It's an excellent analysis of an important part of Revlon-land and has the added virtue of being concise and focused. I recommend reading it in conjunction with my article The Geography of Revlon-Land, 81 Fordham Law Review ___ (forthcoming 2013) (available at SSRN: http://ssrn.com/abstract=2115769), which takes a somewhat broader view of the strange place affectionately known as Revlon-land:

In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the Delaware Supreme Court explained that when a target board of directors enters Revlon-land, the board’s role changes from that of “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.”

Unfortunately, the Court’s colorful metaphor obfuscated some serious doctrinal problems. What standards of judicial review applied to director conduct outside the borders of Revlon-land? What standard applied to director conduct falling inside Revlon-land’s borders? And when did one enter that mysterious country?

By the mid-1990s, the Delaware Supreme Court had worked out a credible set of answers to those questions. The seemingly settled rules made doctrinal sense and were sound from a policy perspective.

Indeed, my thesis herein is that Revlon and its progeny should be praised for having grappled — mostly successfully — with the core problem of corporation law: the tension between authority and accountability. A fully specified account of corporate law must incorporate both values. On the one hand, corporate law must implement the value of authority in developing a set of rules and procedures providing efficient decision making. U.S. corporate law does so by adopting a system of director primacy.

In the director primacy (a.k.a. board-centric) form of corporate governance, control is vested not in the hands of the firm’s so-called owners, the shareholders, who exercise virtually no control over either day-to-day operations or long-term policy, but in the hands of the board of directors and their subordinate professional managers. On the other hand, the separation of ownership and control in modern public corporations obviously implicates important accountability concerns, which corporate law must also address.

Academic critics of Delaware’s jurisprudence typically err because they are preoccupied with accountability at the expense of authority. In contrast, or so I will argue, Delaware’s takeover jurisprudence correctly recognizes that both authority and accountability have value. Achieving the proper mix between these competing values is a daunting — but necessary — task. Ultimately, authority and accountability cannot be reconciled. At some point, greater accountability necessarily makes the decision-making process less efficient. Making corporate law therefore requires a careful balancing of these competing values. Striking such a balance is the peculiar genius of Unocal and its progeny.

In recent years, however, the Delaware Chancery Court has gotten lost in Revlon-land. A number of Chancery decisions have drifted away from the doctrinal parameters laid down by the Supreme Court. In this article, I argue that they have done so because the Chancellors have misidentified the policy basis on which Revlon rests. Accordingly, I argue that Chancery should adopt a conflict of interest-based approach to invoking Revlon, which focuses on where control of the resulting corporate entity rests when the transaction is complete.

This is a revised version of the article, with an expanded discussion of the relevant Chancery Court cases.